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Wednesday, May 04, 2005

Life Insurance Strategies for Older Employees

Thomas Nelson has more long-serving employees than most companies I've seen, and certainly more than any where I've worked previously. Our avoidable turnover last year was 6.6%, down from 7.4% the year before. These are excellent numbers for which we can be understandably proud, but it leads to an emerging need to emphasize benefits for older workers. This post focuses on life insurance issues for our older employees, and strategies for those (like me!) who are getting there.

Our basic life insurance benefit, 100% paid by the company, is 2 times base salary. You can also purchase supplemental life insurance ("supp life"), and the combined base and supplemental cannot exceed $1 million or 5 times base salary. But beware of limitations based upon eligibility, income, and age.

First of all, you can only elect to purchase supp life when you are first eligible for benefits. You have 31 days after you become eligible to elect , then after that you can "buy-up" additional supp life. If you don't elect, you cannot ever purchase supp life without proof of insurability (which can be anything from a questionnaire to a physician's examination), and you are not guaranteed coverage. So, if you have supp life, don't drop it. If you're about to be eligible, elect it even if only the very smallest amount possible as you want the option to purchase more if needed.

Now that you have both basic and supp life, your combined benefit of both cannot exceed $625,000 without proof of insurability, and coverage is not guaranteed. You can purchase up to $30,000 additional supp life each year at Open Enrollment and have guaranteed coverage, but more than that in any one year and you must show proof of insurability.

As you grow older, your life benefits will not stay the same. At age 70 your benefit goes to 65% of whatever coverage you had when you attained age 70. At 75 your benefit drops to 50%.

So, if you want the maximum possible life insurance benefit, and never have to answer insurability questions, you will need $625,000 in coverage when you hit age 70. The age reduction schedule will drop your coverage to $406,250 at age 70, and to $312,500 by age 75. That is the maximum you can have at age 75 under our group life plan. Remember, once you start the age reduction schedule at age 70 you can no longer purchase additional supp life.

So, if you want to hit this maximum number, and you've already elected some supp life, here's a simple set of formulas for you to consider to help you buy-up to the maximum allowable coverage:

1. $625,000 - (salary x 2) = supp life gap

2. Age 70 - current age = remaining "buy-up" years

3. supp life gap/buy-up years = annual supp life buy-up

So an employee making $45,000 at age 35 would have the following buy-up needs:

$625,000 - ($45,000 x 2) = 535,000
age 70 - age 35 = 35 years
$535,000 / 35 = $15,285

Since supp life must be purchased in increments of $10,000, this employee should purchase an additional $20,000 in supp life each Open Enrollment from now on.

Now the more mathematical of you have probably already spotted that you can't get to $625,000 in benefits from $45,000 base salary, because the 5 times salary cap would kick in at $225,000. Mathematically you are correct. However, who knows what this employee may be making in 35 years. Your premiums will be rejected at more than five times base salary, so plan your buy-up as if you'll be eligible for the $625,000 benefit by age 70.

Give me a call at ext. 1400 if you'd like to go through the math for your particular situation. Otherwise, plan now to maximize your benefits later.

Jim